IBM Systems Biz Stabilizes In Q2
The systems business at IBM started to stabilize in the second quarter, with X86 servers and mainframes showing improvements and entry Power Systems machines based on the company’s Power8 processors beginning to ship and a fuller product set expected to roll out before the end of the year. While hardware sales were down in the aggregate, IBM has boosted its operating profits and Power Systems, System x, and storage products all showed sequential improvements from the first quarter.
In the three months ended in June, IBM booked $24.36 billion in revenues, a decline of 2,2 percent compared to the year-ago period, but thanks to cost controls and restructuring that Big Blue initiated last year, net income rose by 28.2 percent to $4.14 billion.
IBM is in the middle of transforming its system business, focusing on its core mainframe and Power Systems platforms and selling off its System x X86 server business to Lenovo Group for $2.3 billion. If all goes well, that deal should close by the end of the year. (The Chinese government has just given the go-ahead of the acquisition by Lenovo, and the US government is still mulling the security issues the deal presents.) IBM’s Systems and Technology Group, which designs and manufactures chips (including but not limited to IBM’s own System z mainframe and Power chips) as well as making servers, storage, and switches, accounted to $3.33 billion in sales externally to IBM as well as $190 million in sales to other IBM divisions, and it posted a pretax income of $25 million in the quarter. Even though those external sales were down 11.4 percent in Q2, the higher $3.76 billion in external hardware sales this time last year came with a $141 million pretax loss. When the System x business is sold off, IBM will see a big drop in revenues, particularly in the emerging markets where hardware tends to be a larger part of the sale compared to deals in the United States and Europe, but presumably will see a marked improvement in its pretax income for Systems and Technology Group.
That is the plan, Martin Schroeter, IBM’s chief financial officer, explained in a conference call with Wall Street analysts going over the numbers. Schroeter reminded Wall Street that intended to “remain a leader in high performance, high-end systems,” and rattled off the $3 billion in chip research, $1.2 billion in the expansion of the SoftLayer cloud, $1 billion investment in Watson cognitive systems, and $1 billion in Cloud Foundry-based BlueMix application framework middleware as evidence of this commitment. He did, however, dodge a direct question about IBM’s commitment to being a chip manufacturer, and it is widely believed that IBM is looking to sell off its chip foundries in Vermont and New York even as it invests heavily in chip technology for the post-silicon world we will be facing in the next six to seven years.
In the quarter, IBM’s Power Systems business declined by 28 percent, and Schroeter said this reflects “fundamental changes in the business” that IBM has been addressing through the establishment of the OpenPower Consortium and the launch of scale-out systems that were designed in part with the input of potential customers such as Google (which is a member of that consortium). Schroeter said that the Power8 launch had a “good start” with the entry machines that debuted in the first quarter and started shipping in June, and then added that the Power8 chip will be introduced in midrange and high-end systems throughout the remainder of the year. Up until now, there has been very little chatter about more Power8 machines coming this year, and in fact, the roadmaps that IBM had been sharing with partners and customers was blank for the second half of 2014 excepting some hybrid machines, perhaps marrying Power8 chips with GPU and FPGA accelerators, that are due later this year.
IBM’s System z mainframe business had a 1 percent revenue decline in the second quarter, with the aggregate performance as measured in MIPS being flat compared to the year ago period. It is the seventh quarter of shipments for the current System z line, and around this time in the cycle, Schroeter said that IBM expects sales to be off more on the order of 15 percent. Interestingly, he said that the current System z generation had extracted 98 percent of the revenues and gross profits of the prior generation in those seven quarters, and they still have several quarters of sales for these machines. Moreover, thus far the aggregate MIPS capacity shipped for the machines using the z12 engines is 25 percent higher than the prior z11 generation.
IBM’s System x server business was down only 3 percent in the second quarter, which is a far cry better than the 18 percent decline in the first quarter. In storage hardware, IBM had strong sales of its FlashSystem arrays and Storwize arrays had double-digit revenue growth, but overall storage hardware sales still declined by 12 percent as midrange and high-end DS series arrays declined.
IBM’s Software Group was a little lighter than many expected, with $6.88 billion in revenues, up a point. Schroeter said that SaaS revenues were up nearly 40 percent in Q2 and that application server sales were being driven by the explosion in mobile applications and rose by 5 percent. And even though relational database sales were up in the quarter, the overall Information Management division within Software Group had a 1 point decline.
The Global Services behemoth brought in $13.95 billion in revenues, off 1.4 percent, and the services backlog as down 1 point to $136 billion as the second quarter ended. Customers are doing shorter services engagements in the Global Business Services part of this business (about a third of the pie), but the SoftLayer cloud added about 1 point of growth to the Global Technology Services part of the business. All told, Global Services gave IBM $2.68 billion in pretax income, the same figure as Software Group delivered in the quarter.
